Understanding Property Depreciation

Property depreciation is a tax deduction that allows real estate investors to recover the cost of income-producing property through annual deductions over the property's useful life. This non-cash expense reduces your taxable income, providing significant tax benefits.

Key Concepts:

• Depreciable Basis: The total amount of the property that can be depreciated, calculated as the purchase price minus the land value plus any improvement costs.
• Annual Depreciation: The amount by which the property's value decreases each year, based on the depreciable basis and the property's useful life.
• Tax Savings: The reduction in taxable income resulting from depreciation deductions, calculated using your marginal tax rate.
• Remaining Property Value: The property's value after accounting for total depreciation taken to date.
• Cumulative Tax Savings: The total tax savings accumulated over the property's depreciation period.

How to Use This Calculator:

1. Enter the Purchase Price of the property.
2. Specify the Land Value, which is the portion of the purchase price allocated to the land and is not depreciable.
3. Input any Improvement Costs incurred to enhance the property's value.
4. Select the Purchase Year when the property was acquired.
5. Choose the Useful Life of the property based on IRS guidelines (27.5 years for residential and 39 years for commercial properties).
6. Enter the Current Year to calculate depreciation up to that point.
7. Input your Tax Rate to determine the tax savings from depreciation.
8. Click Calculate to view the results and visualize the depreciation over time.

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